Saturday, July 23, 2011

"The first top-to-bottom audit of the Federal Reserve uncovered eye-popping new details about how the U.S. provided a whopping $16 trillion in secret loans to bail out American and foreign banks and businesses during the worst economic crisis since the Great Depression. An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one year ago this week directed the Government Accountability Office to conduct the study. 'As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world,' said Sanders. 'This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else.'"

Friday, July 22, 2011

Oddly enough, in a critique of Larry Summers, biologist and philosopher Massimo Pigliucci makes the following claim: "I simply do not buy the fundamentalist (yes, I’m using the term on purpose) libertarian idea that economics is all there is or that should count in pretty much all human transactions and social problems".

Simply put, Pigliucci errs if he labours under the impression that such an idea is a libertarian one. Libertarianism is a political philosophy, hence it contains a set of prescriptions concerning relations between human beings. Various kinds of libertarianism exist, but if one unifying proposition is a constituent of all of them its the notion that initiated physical force or the threat of initiated physical force should be minimized. Since the government is the most prolific initiator of physical force and threats of physical force, naturally it is the bete noire of libertarians.

Libertarians typically employ economics to attempt to demonstrate the alleged prudence of minimizing government coercion. They argue the discipline of economics proves that maximizing social welfare requires the circumscription of government power. Economics is but one method they use to attempt to prove the wisdom of their creed of "non-aggression". The pervasiveness of economic deliberation and reasoning among libertarians stems from the fact that it enables them to identify and understand the mal-effects of government intervention. Libertarians do not treat economics as the be all and end all of intellectual life. It would be inappropriate to employ economics at the expense of other approaches. But if an issue involves the use by humans of scarce means to achieve ends, then economics has got something to say about it.

Thursday, July 14, 2011

"A top defense and aerospace industry trade organization is pressing House Speaker John Boehner (R-Ohio) to resist deep Pentagon budget cuts as officials grapple with the nation’s troubled finances.

In a letter to Boehner, Aerospace Industries Association (AIA) President Marion Blakey argues substantial Defense budgets cuts would spawn new job losses and further damage the already injured economy.

Capitol Hill and defense industry sources tell The Hill that negotiators have discussed national security spending cuts as large as $700 billion over a decade; that is almost twice as much as the $400 billion in security cuts by 2023 that President Obama has called for.

'Deeply cutting defense during these tough economic times could make our nation’s fiscal and broader economic situation even worse,' Blakey wrote. 'Major cuts to defense would create further layoffs and great uncertainty for them and their families and undercut economic gains.'"

Blakey conjures up an interesting argument: give my constituents more money or run the risk of blighting the economy. Now given all the ridicule with which to bespatter Ms. Blakey, who is an example par excellence of the category of human being who lobbies on behalf of the industry that he or she has previously been in charge of regulating, epitomizing the worst elements of the infamous Washington "revolving door", I nevertheless won't discount her last-ditch argument merely because she has a financial stake in the acceptance of her conclusion. To do so would be to commit the vested interest fallacy. Her economic allegations are more than enough cannon fodder.

The premise from which Blakey's proceeds should be a familiar one. It is a conclusion of military Keynesianism, a variant of Keynesianism which holds, among other things, that increasing military spending can contribute to economic growth and that increasing such spending is advisable during or in anticipation of recessions as part of a policy of increasing aggregate demand to hedge against recessions.

It should be no surprise that military Keynesianism commits the same errors as standard Keynesianism.

First off, it underappreciates the opportunity cost of government spending. As a reminder, opportunity cost, as I employ it, refers to the value of the next-most-preferred alternative use of a set of resources.

Suppose a $100 billion military budget is sufficient to protect the nation from foreign aggression. Fine. Military Keynesians, at least under certain conditions, would have the government expand this budget by an unspecified amount, say another $100 billion, on the grounds that doing so will increase economic growth. Well, since $100 billion is scarce (money is a scarce resource), $100 billion spent by the government means $100 billion denied to the private sector, where it could have been used for consumption and investment. This is known as the crowding-out effect.

Moreover, we have every reason to expect, in advance, that the opportunity cost of allowing the government to spend $100 billion is greater than the opportunity cost of allowing the private sector to spend $100 billion because of incentives. Within the private sector, the prospect of profits or losses incentivizes prudent consumption and investment habits. No such similar prospect exists within the "public sector", where the survival of a firm is not necessarily contingent upon performance in satisfying demand and where the assurance of revenue (e.g., taxation) erodes the incentive for wise decision-making.

Th crowding-out effect occurs as well if the spending is made possible by debt financing. Hence, if the government borrows money in order to expand the military and subsidize the defense industry, the borrowing represents in increase in the demand for credit which raises interest rates. Rising interest rates mean more expensive credit for private sector economic agents, thus crowding them out of the credit market.

The cyclical prescriptions of military Keynesianism are derived from the notions that recessions are caused by a lack of aggregate demand and that recessions are to be avoided. The former is misleading and the latter is false altogether. Recessions begin, in the words of economist Jesus Huerta de Soto, after "the pace of credit expansion unbacked by real saving stops accelerating". Central banks incite faux economic expansions by increasing the supply of credit in the absence of an increase in the supply of savings, i.e., monetary inflation. This causes interest rates to fall, which in turn causes the quantity of credit demanded by firms to rise. As firms acquire more credit, they begin to spend more money, principally to acquire additional factors of production, capital goods in particular, with which to produce more goods for customers. This process bids up both capital goods and consumer goods (price inflation, in other words), as the additional money introduced into the economy is spent and as factors are withdrawn from lower order stages of production (consumer goods) to higher order stages of production (capital goods).

As price inflation rises, monetary authorities typically reduce the supply of credit in order to halt it, which causes a rise in interest rates. This sparks the recession. Interest rates rise (even past pre-credit expansion levels due to increases by lenders as a hedge against price inflation and the increase in demand for credit by firms in anticipation of even higher future interest rates), credit becomes scarce, firms operating with higher order production stages get priced out of the credit market and become credit starved, leaving them with incomplete investment undertakings staffed with labour, land, and capital goods that must be "liquidated" or sold so as to cut losses and avoid insolvency. This process of liquidation is called a recession.

Recessions however are to be treated as visits to the dentist - painful but necessary - not as painful and unnecessary events. The liquidation process must occur because too many investment projects are incomplete and too costly to continue (due to rising interest rates). In addition, the high prices of goods, especially capital goods, is an effect of a dis-coordinating decision by the monetary authorities to expand the supply of credit without an equal expansion of savings, hence those prices must be allowed to fall so as to allow for the proper coordination of economic agents. Military Keynesianism, therefore, is powerless to correct the mal-adjustments produced by such credit expansion, for the solution is an economic contraction, not additional spending.

I draw attention to this issue because more than enough Republicans in Congress, despite their apparently shallow demands to cut spending, have demonstrated their unwillingness to cut the budget of the Defense Department. They claim to oppose Keynesianism, but will they show clemency towards this version of Keynesianism because of the military element? I won't hold my breath, as was once said.

Saturday, July 2, 2011

In a piece in the New York Times, Nicholas Kristoff attempts to discredit Republicans by arguing that the epitome of what they supposedly desire - "a low tax, laissez-faire Eden" equipped with a limited government - can be found, of all places, in Pakistan. Let this be a reason to question Mr. Kristoff's expertise on foreign political economy.

Kristoff's "critique" is aimed at Republicans, and while I won't take this opportunity to defend them I will nevertheless venture to expose the errors in his argument. According to Kristoff, "[Pakistan] has among the lowest tax burdens of any major country: fewer than 2 percent of the people pay any taxes. Government is limited, so that burdensome regulations never kill jobs."

Its true that, according to the Heritage Foundation's 2011 Index of Economic Freedom, Pakistan's fiscal freedom is greater than the world average fiscal freedom, but Kristoff cannot conclude much from this premise. Hong Kong and Singapore far exceed Pakistan in terms of fiscal freedom and the standard of living in both nations is world class. Hence, it can hardly be argued, as Kristoff does, that "'starving the beast' of government, cutting taxes, regulations and social services...are steps toward Pakistan", i.e., sufficient, when combined, to plunge a nation into destitution and underdevelopment, since Hong Kong and Singapore, developed as they are, lead the world in the absence of those government controls and are neither like Pakistan nor in danger of becoming like Pakistan. The 2011 Index says it all. Furthermore, advocates of reducing government interference into the economy do not argue that tax cuts are a sufficient cause of economic development.

Kristoff's claim that the government of Pakistan is "limited" is as asinine. Again, according to the Index, Pakistan is designated as "mostly unfree" with a score of 55.1 out of 100 and a rank of 123th freest nation out of 179 nations. Read the report for yourself. For example, investment freedom in Pakistan is abysmal. According to the Index,

"Deterrents to investment include security threats, political instability, civil unrest, corruption, poor infrastructure, weak contract enforcement, inconsistent and arbitrary regulation, and a lack of coordination between the federal and regional governments. Payments, transfers, and capital transactions may be subject to approval, quantitative limits, and other restrictions. Foreign investors may acquire real property."

Financial freedom is as non-existent, as the Index states that,

"The government has a majority stake in the largest commercial bank and controls several specialized banks. Restrictions limiting the number of foreign bank branches have been removed, but the central bank must approve all new openings. Foreign investors are now allowed to hold up to 100 percent of the equity share of insurance companies."

Monetary freedom is severely obstructed. Again, according to the Index,

"The government controls pharmaceutical and fuel prices, subsidizes agriculture, and influences prices through state-owned enterprises and utilities, including electricity and water. Ten points were deducted from Pakistan’s monetary freedom score to account for measures that distort domestic prices."

Protection of property rights is atrocious and corruption is "pervasive" with the Index stating that "Pakistan’s judiciary, separate by law from the executive, remains hampered by poor security for judges and witnesses, sentencing delays, a huge backlog of cases, and corruption." According to the 2010 International Property Rights Index, Pakistan ranks 113 out of 129 (see page 117) nations examined in terms of the quality of protection for property rights, which puts it below nations like Iran and Serbia. According to the Corruption Perceptions Index of 2010, Pakistan ranks 143rd out of 178 nations examined, putting it behind countries like Zimbabwe, Syria, and Ukraine. If Pakistan was truly a capitalist paradise, then the above non-freedoms and non-respect for private property rights would not exist there.

Kristoff attempts to reassure us when he claims that,

"I spend a fair amount of time reporting in developing countries, from Congo to Colombia. They’re typically characterized by minimal taxes, high levels of inequality, free-wheeling businesses and high military expenditures. Any of that ring a bell?"

Again, Kristoff is implying that the alleged laissez-faire conditions in countries like Congo and Colombia are contributing factors to the poverty and neglect within this countries. Predictably, neithercountry is characterized by laissez-faire conditions, particularly Congo which ranks 168th on the Index of Economic Freedom. A variable or variables cannot be blamed for having produced a certain effect if said variable(s) do not exist to begin with; a thing must exist before it can cause an effect. Hence, one wonders from where Kristoff receives his information.

A "laissez-faire Eden" is a place where the exercise of property rights is not stifled by government interference, corruption, or violence. Why Kristoff labours under the impression that Pakistan is such is beyond me.

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As a side note, I'm now settled in in my new residence in Alaska, so the long absences are a thing of the past for now.